Our Blog: The Podium

Sell-Side Coverage – A Small Cap’s White Whale?

By Dennis Walsh, Vice President

I recently was interviewed for an article for IR Magazine titled, “Sell-Side Analysts: The Many and the Few.” The article discussed how some companies manage a full roster of covering sell-siders, while others struggle to maintain or attract just a few. In today’s market, it seems more common that IROs are in the latter situation and are frustrated by the limited return on their efforts to attract coverage.

There are many factors that contribute to the lack of adequate sell-side coverage, and all of these factors relate to the sell-side’s inability to make money by working with a particular company. Low trading volume plagues companies vying for attention from both the buy- and sell-side. The buy-side avoids low-volume stocks because they cannot easily get out of the stock, and the sell-side won’t cover a stock because the lack of buy-side interest limits their ability to generate trading commissions. It’s a vicious cycle. In addition, the lack of investment banking business may create a barrier to coverage. The bottom line is that the bank needs to make money in some way from the research coverage since they are not being compensated from the buy-side in hard dollars.

So what’s an IRO to do? First and foremost, develop a solid pitch. Most sell-side analysts already are covering a heavy load of companies and their support team is often limited. This leaves little room for new companies in their coverage universe. When targeting analysts for coverage, you need to provide them with a compelling reason that they should be interested in your company. If they cannot see the potential for growth early on during due diligence, they are unlikely to move forward.

“Just because a company has a low market cap or is thinly traded now, does not mean there is no value in covering it,” said Avinash Kant, Vice President, Senior Research Analyst at D.A. Davidson & Co. “If an analyst initiates coverage early on, they can make a good name for themselves as the company grows and delivers returns to investors. Set realistic goals and outline your systematic strategy for achieving them - but don’t overpromise. We want to see a clear path for how the company is going to generate revenue, improve margins, etc. over the next three to five years. Analysts remember these promises and will challenge you on them later and use them to benchmark your success.”

Another angle to get on a sell-side analyst’s radar is to make the clear case that by covering your company it will help them to better understand the market drivers that affect the larger businesses they currently cover. If an analyst cannot easily see the benefit to them for covering your company, they likely won’t be interested.

Micro- and small-cap companies should focus on targeting boutique sell-side firms for a better chance of success. Some boutique firms prefer to find under-covered stocks and be the first to initiate coverage. The thinking is that if they establish a relationship early on, the company will likely include them in future banking deals. Conduct “company-sponsored” non-deal roadshows with these firms and solicit invitations to present at conferences. Your management team should be prepared to attend a conference at the last minute, as banks will often extend invitations to companies they don’t cover when there is a cancellation.

Attending conferences and participating in non-deal roadshows with non-covering banks is one of the most effective strategies for attracting new sell-side coverage. Nurturing a relationship with an analyst takes time, and they need to see that there is buy-side interest in your company.

“It’s like a dating period,” said Kant. “When management participates in bank-sponsored events, we see that they are willing to commit to corporate access days, but we also get the opportunity to better understand the company, learn what the investor concerns are and gauge the level of client interest.”

While it may seem like a lost cause to try and secure new sell-side coverage, there is hope. Revisit your pitch and make sure it demonstrates a clear strategy for growth. Expand your targeting of sell-side analysts to include boutique firms. And don’t be afraid to go on a few “dates” with different analysts in order to establish a mutually beneficial relationship that will ultimately result in coverage and greater exposure to investors.

Dennis Walsh is Vice President at Sharon Merrill. He counsels clients on a broad array of investor relations and corporate communications issues such as market research, competitive intelligence, earnings announcements, investor targeting, roadshow planning and social media. Dennis oversees Sharon Merrill’s Socialize IR consulting service, which is designed for public companies that recognize the benefits of incorporating social media into their shareholder engagement program.

Subscribe to our weekly email: Investor Relations Around the Web

IR Program Planning, Corporate Access, Sell-side Research, Targeting, Investor Relations Agency, Buy-Side, Sell-side Coverage, Investor Conference, Roadshow Planning, Small-cap IR, Investor Relations

Subscribe to The Podium!

Connect with your Investors

Establish a sincere connection with investors to communicate key messages during your Investor Day. Download our free e-book on effective presentation habits, and learn to deliver ideas with confidence and clarity.

Delivering Effective Presentations

When it's time for a change

Whether planned or sudden, it is crucial to communicate the succession of high-profile positions effectively. Download our three-part e-book and learn the best way to craft a plan for CEO, CFO and Board of Directors transitions.

Download Your Free eBook: Communicating Management Transitions 

Be Proactive, Not Reactive

With our new Proxy GamePlan, we create a year-round, data-driven strategic roadmap for effective shareholder engagement. Implement a best-in-class program rooted in a deep understanding of your company’s proxy practices, shareholder voting trends and peer landscape.

Learn More About Proxy GamePlan

Find Effective IR Counsel

Whether you’re seeking external IR counsel for the first time or evaluating your current provider, you need a firm that understands your strategy, adapts to your culture and tells your story. Download our free guide on how to assess the effectiveness of an investor relations firm.

How to Assess  an IR Firm

Activism Defense

No company is immune to shareholder activism. Sharon Merrill helps boards of directors and executive management teams identify the activist red flags lurking in your shareholder base, assess your governance risks and develop an action plan to prevent, detect and neutralize any threats. Download our free white paper, “Leveraging Institutional Shareholder Relationships to Reduce Activism Risk,” and learn how the best defense against activism is a strong offense.

Download Activist Defense White Paper

Captivate your Audience

Speaking persuasively is critical in today’s competitive business environment. Effective speakers use voice techniques and body language that project authority and credibility. Download our free e-book, “A Guide to Delivering Captivating Presentations,” for insight into good -and bad- presentation habits, and learn how to improve your skills.

Become a Persuasive Speaker 

Perceptions Matter

How do you ensure that investors clearly understand your strategy, growth drivers and market position? The most effective way is through a perception study. By periodically taking the investment community’s pulse you can avoid the knowledge gaps and misperceptions that hurt valuation. Download our free whitepaper, Why Perceptions Matter, to learn more.

Download your free copy of  'Why Perceptions Matter' 

Common Topics:

More topics